How useful are the Seasons models

The Seasons model was made popular by Ray Dalio from Bridgewater Assoc., one of the most successful investors of our times.

The concept we apply is fairly simple:

1. define 4 macro regimes:

   1. Goldilocks: solid economic growth with little inflation

   2. Reflation: solid economic growth with inflation

   3. Stagflation: stagnant economic growth with inflation

   4. Deflation: stagnant economic growth with little to negative inflation

2. define appropriate asset allocations/ portfolios that should blossom under each individual regime

   1. Goldilocks:

      1. Long: ['XLB' ,'XLI' , 'NDX' , 'XLY' ] -
         Materials, Industrials, Tech, Consumer Discretionary

      2. Short: ['UUP', 'XLE' , 'XLP' , 'XLU' , 'XLV'] -
         US$, Energy, Staples, Utilities, Healthcare

   2. Reflation:

      1. Long: ['RUT' , 'USO', 'XLE', 'XLI', 'NDX' , 'XLY'] -
         Small Caps, US OIL, Energy, Industrials, Nasdaq, Consumer Discretionary

      2. Short: ['UUP', 'XLP' , 'XLU' , 'TLT'] -
         US$, Staples, Utilities, 20yr Treasury Bonds

   3. Stagflation:

      1. Long: ['TLT', 'USO' , 'NDX', 'XLU', 'XLE']

      2. Short: ['UUP', 'RUT' , 'XLB', 'XLF' , 'XLP']

   4. Deflation:

      1. Long: ['TLT' , 'GLD' , 'UUP', 'XLP' ,'XLU', 'XLV']

      2. Short: [ 'USO' , 'XLE' , 'XLF', 'XLI', 'NDX']

3. measure the BARO Indicator aggregate for each portfolio

4. smooth (3) on quarterly basis to gain a more medium term perspectice

5. Define a Risk On regime by:

   1. Risk On = Bullish Regimes - Bearish Regimes
      = (Goldilocks + Reflation) - (Stagflation + Deflation)

So far the theory, but how does it look in practice….

Let’s have a look at the current Goldilocks portfolio:

• You can observe how each sector (adjusted for Long or Short) is adding to the overall Goldilocks reading

Doing this for all regimes we come up with the following:

….and for the quarterly analysis:

Interpretation / Application:

• The seasons model measure the health of the market by comparing the performance of an idealized portfolio with the current market environment…

  • if we are in a bull market, than certain sectors have to perform well (and vice versa)

  • effectively the model gages whether the performance “under the surface” of the main indices has a healthy composition

• Characteristics of the model:

  • keeps you safe from major drawdowns

  • provides somewhat reliable early warnings

  • primarily acts as a confirmation and warning tool rather than a perfect market timing tool

• Current set up:

  • we are fading from a dominant deflationary regime (see quarterly analysis) to a Goldilocks set up (see analysis above)

  • Goldilocks seems to have the hightest momentum

  • no single regime has prevailed over the last couple of month (flip-flopping) which adds a degree of uncertainty